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In Director Pay, One Size Fits Many

Company size has minimal effect on the level of director compensation, Hay Group survey shows.

Pay for directors at U.S. companies rose only slightly last year, and the level of director pay was little affected by the size of the company. A survey of 300 large companies by consultancy Hay Group found median director pay rose to $227,250 in 2011, up 6% from $213,774 in 2010.

According to Hay Group, the median pay for directors at largest of the companies surveyed—those with annual revenue of more than $40 billion—was only 21% higher than that for directors at the smallest companies—those with revenue of less than $10 billion. The median pay for directors at the largest companies was $252,500 last year, up 6% from 238,100 in 2010, while the median for those at the smallest companies was 209,000, up 5% from $200,000.

“When you really look at director compensation, it’s a very narrow range,” says Irv Becker, national practice leader of Hay Group’s U.S. compensation practice, noting that executive pay shows wider ranges between the largest companies and smaller ones. “We’re seeing minimal differences between the organizations with director pay.”

Becker, pictured at right, notes that even directors at smaller public companies take on a great deal of fiduciary responsibility. “The efforts involved in those jobs are very similar to those at the larger companies,” he says. “There still should be a [pay] difference, larger companies tend to be more complex, but the differences are getting smaller.”

Corporate directors are coping not only with increased regulation but with an increase in shareholder activism, he says. “Sure, they have to comply with Sarbanes-Oxley and Dodd-Frank, but I think we’ve seen shareholders be more willing to challenge companies and directors in the last few years.”

Just 31% of companies paid board meeting fees in 2011, down from 35% in 2010, and only 35% of companies paid directors to attend audit or compensation committee meetings. Becker notes that showing up at meetings is just a “minimum expectation” of the job. Eliminating fees for board meetings also does away with worrying about whether to classify a certain discussion as a meeting. “They’re getting a retainer and if you want to have 10 board meetings or 20 board meetings, it’s not going to matter.”

Whether a company pays fees for committee meetings has more to do with each company’s circumstances. “If a board has certain committees that really do work much harder than other committees, and the board is a larger board where they have different people sitting on each committee, those types of companies tend to retain the meeting fees,” Becker says. He also notes that eliminating committee fees is a trend that started at the biggest companies. “At midsize companies, we still see a lot of companies using committee meeting fees.”

When it comes to company stock, just 17% of the companies surveyed used stock options for director compensation in 2011, down from 23% in 2010. Almost three-quarters (73%) of companies granted restricted stock and restricted stock units, up from 71% in 2010.

The move away from stock options is a longstanding trend in both director and management compensation. “Five, 10 years ago stock options would have been the No. 1 vehicle being used on director compensation and we’ve really seen a steady decline in their use,” Becker says, citing accounting issues as well as the perception that stock options are a “risky incentive vehicle.”

He notes that director compensation is markedly different from executive pay. “Management compensation is all about pay for performance, so when you see changes in management compensation, hopefully it is tied to how well the company has performed and how large the company is. Director compensation, the focus is on a minimum level of compensation for the responsibilities these folks have.”

The lack of variation in pay has implications when companies are recruiting new directors, Becker adds. “It’s going to be hard for companies to differentiate themselves on compensation alone. It is all about the reputation the company has and does this director want to align themselves with the reputation and values of the company. That’s what the decision is going to be about.”

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